The prospect of owning your own home is exciting – after all, it offers the opportunity to create the perfect environment for you and your family.
You can choose the size, design, fittings and decor of your home and can even save money compared to buying an existing property.
But building your own home is also a huge undertaking that comes with many hurdles – and before you can overcome any of them, you need to figure out how to pay for it.
For many, this means taking out a self-construction mortgage.
Here is a summary of what you need to know.
What is a do-it-yourself mortgage?
A self-construction mortgage allows you to borrow money to buy the land you want to build on as well as finance the construction of the property yourself.
Unlike a regular mortgage, where funds are released after completion, a do-it-yourself mortgage releases the loan in stages, usually as different parts of the construction are completed.
This is to minimize the risk for lenders who want to be sure that the money will be spent as planned and will not run out before the project is complete.
When exactly the funds are released differs depending on the self-made mortgage lender. But the following key phases are common:
- Buying the land
- Building the foundation
- Construction of the property walls
- Make the building wind and waterproof (add roof, windows and outside doors)
- Completion of plumbing, electrical and plastering work
- Completion of the project and appraisal of the house.
What types of self-build mortgages are there?
There are two main types of self-build mortgages:
The most common type of self-construction mortgage where the funds are released to you after the fact – as each stage is completed. A real estate appraiser usually visits the construction site at each stage to check that the work is done and the project is on track before the lender releases the money.
You must cover the material and labor costs yourself in advance before you amortize the costs.
Therefore, a late payment mortgage is best for DIY builders with enough cash or for those willing to use a bridging loan or other short-term borrowing to cover costs upfront.
Here the lender releases payments at the beginning of each construction phase so that you can use the funds available for material and labor costs.
This type of self-construction mortgage is therefore a better option for those with smaller savings pots. Nor is it necessary for a reviewer to visit the website before each payment.
However, fewer lenders offer do-it-yourself mortgages with prepayment.
Can I get a self-construction mortgage?
Lenders tend to be extra cautious with self-construction mortgages – and the qualification requirements depend on the mortgage provider.
To improve your chances of getting a self-construction mortgage, it is important that you prepare detailed plans for your property as well as supporting documents, such as:
- Building permit
- Architectural and architectural drawings
- building authority approval.
You will also need to provide a forecast of the cost and timeframe that will be incurred, as well as risk assessments and contingency plans.
It is recommended to include at least 20% contingency in your construction cost estimate.
This also takes into account where you want to live while you are building your home. For example, if you already have a mortgage or flat rent, your mortgage or rental payments will affect your affordability calculations.
A good credit rating, a high down payment and proof of a reliable income will also benefit you and increase your chances of getting approval – even if you are a first-time self-builder.
What deposit do I need for a self-construction mortgage?
Do-it-yourself mortgage banks require larger deposits.
As a general rule of thumb, credit should be limited to around 75% of the total cost of the land and building, or the final valuation of the property.
Some do-it-yourself mortgage providers lend more depending on the circumstances. For example, Ökologie-Bausparkasse lends up to 80% of the completed property value as a repayment loan, but only up to 65% on an interest basis.
Halifax Intermediaries says it will lend up to 75% of the final valuation as long as the loan does not exceed the total cost of the land purchase and construction.
You may be able to get more credit through the specialist mortgage broker Buildstore. It says it can offer self-construction loans of up to 95% of the land and construction costs, either retrospectively or in prepayments – as long as your plans and sums pile up.
With a wide variety of options and variables available, it pays to contact a mortgage broker with experience in the industry before making a decision about your self-build mortgage.
What are the interest rates on do-it-yourself mortgages?
The interest rates for do-it-yourself mortgages tend to be higher than for standard mortgages – typically between 3% and 6%.
As with standard mortgages, you can usually choose between a fixed rate – where the interest rate stays the same for a period of time – or a tracker that allows the interest rate to fluctuate.
Either way, the better your credit rating and the higher your deposit, the more likely you are to get yourself a competitive rate.
You may well have to pay a product or arrangement fee, which can be a few hundred or a few thousand pounds depending on the lender and mortgage business.
Many lenders allow you to repay your mortgage on an interest-only basis during the construction phase. This means your monthly payment will be lower as it will only be used to pay off the interest costs and not the principal on loan.
Once the property is completed and a qualified RICS appraiser has confirmed that the home is habitable, you should be asked to switch to a standard mortgage with a lower interest rate. Just watch out for prepayment penalties.
What about stamp duty?
One of the greatest advantages of a self-build mortgage is that you don’t have to pay stamp tax on construction costs or property value once it’s complete. This has the potential to save thousands of pounds.
Stamp duty is only payable on the land itself and only if the land costs more than £ 125,000.
Due to the Covid-19 pandemic, this was temporarily increased to £ 500,000 by June 30, 2021.
What else should I watch out for?
Before you start building your own, carefully consider who will do the work. If you are a builder, plumber, or electrician, you may be able to do some work yourself and hire other craftsmen if necessary to keep costs down.
Also, consider whether you plan to manage the project yourself. Craftsmen, a surveyor, and an architect are among the people you need to hire.
If you don’t have the time – or don’t want to take responsibility – you can hire a contractor to manage the project on your behalf, at an additional cost, of course.
Are there alternatives?
If you are unsure whether a home build mortgage is right for you, there are several other options that could help you finance your construction:
Savings: Provided you’ve saved enough, you can use your savings to finance your dream home.
Debt rescheduling: If you have enough equity in your current home, you may be able to reschedule and borrow more money for your property at the same time.
Private loan: Personal loans are unsecured, which means there is no need to use an asset as collateral. The downside is that they are typically capped at £ 30,000, so they serve as a top-up rather than funding an entire do-it-yourself project.
Secured Loan: With this type of loan, you can take out significantly more loans than with a personal loan. But you need to hedge it against an asset like your property. If you can’t keep up with your repayments, you risk losing that fortune.
Bridging loan: This is a type of short term financing that can be used to buy land quickly. The terms can vary from a month to three years and you can usually borrow £ 25,000 or more.
Since bridging loans are short-term, interest rates are high. You may also need to hedge the loan against your current property and the property you are building.
However, once your project is complete, you can apply for a standard mortgage to repay the loan.